PLSA calls on government to make six changes to enable UK growth investment

The trade body’s recommendations – contained within a policy position paper on pensions and growth – follows a PLSA consultation with a range of pension providers, policymakers, think tanks and other stakeholders over the summer and builds on the findings of its June 2023 report, Pensions & Growth.

The PLSA makes specific policy recommendations to government in six key areas:

1. Pipeline of assets: The PLSA said the government should ensure there is a stream of high-quality investment assets suitable for pension fund needs. The British Business Bank should be given the task of identifying and providing UK productive finance assets that achieve the right risk-return characteristics and low cost needed by pension funds. These should not only include unlisted equities but also other illiquid assets such as unlisted debt and infrastructure. The government should also support action by the asset management industry in providing suitable growth funds or investment vehicles, such as the long-term asset fund (LTAF).
2. DB regulation: The PLSA said the funding regulations that apply to defined benefit (DB) pension funds should be amended to provide greater flexibility over their investments. In particular, it said Department for Work and Pensions regulations, and the related The Pensions Regulator DB funding code should allow open DB pension funds, and closed DB pension funds with long investment time horizons, to take more investment risk where this is appropriate to protecting member benefits. For example, it said the regulatory regime should allow pension funds to place more reliance on the support of the sponsoring employer, more flexibility over the discount rate used, and not force schemes to reduce the investment risk they take by aiming to achieve the “low dependency” funding level.
3. Taxation: The PLSA said fiscal incentives should be introduced that make investing in UK growth more attractive than competing assets. The PLSA said it would particularly like the chancellor to allow tax free dividends on investment by pension funds in UK companies, and to provide additional tax incentives, like the LIFTS initiative, in UK start-ups and companies requiring late-stage growth capital.
4. Consolidation: The PLSA said the government should prioritise the passage of a bill through parliament to establish a secure and statutory regime which will enable the growth of DB superfunds. It said the government should additionally take other action necessary to support the consolidation of assets in DB master trusts and with insurers through buyout and buy-in contracts. It said measures to encourage the consolidation of Local Government Pension Scheme (LGPS) assets into the eight asset pools must only take place where the pools can offer the right investment products and it should be done at a pace that protects the value of the contributions paid in by employers and employees. The PLSA added that the government should continue with its planned programme of action to encourage the consolidation of defined contribution (DC) schemes, notably through the use of value for money tests.
5. Market for DC under auto-enrolment (AE): The PLSA said the operation of the market in which employers and trustees select their DC pension funds for AE purposes must be reformed so that there is less focus on cost and more on performance. The PLSA noted that, currently, a mandate can be lost due to a difference in annual charges of only a few fractions of a percentage point. It said that often, this lower cost is achieved by adopting a simpler, less sophisticated investment strategy. In addition to action already being taken by the government on introducing a value for money test, the PLSA said it believes the advice by corporate IFAs and investment consultants to employers on pension schemes should focus on net performance rather than cost and be aligned with achieving the long-term interest of savers.
6. Raising pension contributions: Finally, the PLSA said the UK must increase the flow of assets into pensions by gradually increasing the level of pension contributions under automatic enrolment from today’s 8% of a band of earnings to 12% of all earnings starting in the mid-2020s and finishing in the early 2030s. Today, employers only pay 3% while employees pay 5%; we believe this should be equalised so that each pays 6%. The PLSA said raising AE contributions in this way would provide a deep and lasting pool of investment assets for decades to come.

PLSA director of policy and advocacy Nigel Peaple explained: “Since early 2023 there has been considerable discussion by politicians, think tanks and the media on whether and how pension funds can be encouraged to invest more in the UK economy, especially regarding companies with the potential for very high growth, albeit usually also at high risk.”

He added: “While it is imperative that pension schemes’ freedom to invest in the best interests of their members, however they see fit, is protected, the PLSA has worked hard to identify specific policy reforms that could result in further investment in the UK, following the Mansion House reforms in July.

“We have identified six policy, regulatory and fiscal changes that could bring benefits to both pension scheme members and the UK economy, without the need for radical, highly disruptive changes to the operation of the UK retirement savings system.”

The policy recommendations come as speakers at the PLSA’s annual conference in Manchester said DB schemes were effectively currently working against the government’s productive finance agenda as increasing surpluses are leading many to actively de-risk portfolios.

WTW head of GB clients Pieter Steyn said the industry currently faced a “productive finance predicament” – noting that, while the government was actively promoting scheme investment in growth assets, DB schemes had not only stopped investing in these assets but were actively coming out of then, sometimes at a discount.

Steyn said this “wall of money” was coming out of productive assets as increasingly well-funded DB schemes looked to de-risk and funnel assets through to the insurance regime.

He added: “At this point in time, the DB pensions industry is working against the government’s productive finance agenda.”

WTW GB head of retirement Rash Bhabra agreed that, at a time when the majority of UK pension funds were in surplus, there was little incentive for schemes not to take risk off the table.

Added to this, he said the whole mantra from the regulator over the past 15 years had been to take risk off.

He added: “It is not surprising we are seeing the change we are seeing.”

Bhabra said the rules of the game needed to change and pointed towards a list of six regulatory changes WTW had proposed at the beginning of July to seize the DB surplus opportunity – changes the firm says would provide a potential upside for risk taking in pension schemes.